The Pace of Internationalization of smes – Born Global vs. Gradual Global


The Pace of Internationalization of SMEs – Born Global vs. Gradual Global




Work in Progress


Siv Marina Karlsen

PhD-candidate

Department of Marketing

Norwegian School of Management BI

Elias Smiths vei 15, Box 580

N-1302 SANDVIKA, NORWAY

Phone + 47 67 55 73 43

Fax + 47 67 55 76 76

E-mail The Pace of Internationalization of smes – Born Global vs. Gradual Global: siv.marina.karlsen@bi.no

Abstract
The objective of this study was to describe the process of internationalization of SMEs and to explore/explain why some become more gradual global and some are The Pace of Internationalization of smes – Born Global vs. Gradual Global born global. This is due to the fact that increasing evidence shows that in spite of small size and inexperience in international transactions, high value-adding manufacturing firms are capable of outperforming their larger The Pace of Internationalization of smes – Born Global vs. Gradual Global, more resourceful counterparts in foreign markets. The aim was to get more knowledge about this new type of firm – what characterizes Born Globals and the internationalization process?
^ Introduction Background
The The Pace of Internationalization of smes – Born Global vs. Gradual Global objective of this study is to describe the process of internationalization of SMEs and to explore/explain why some become more gradual global and some are born global. Empirical evidence from many countries support The Pace of Internationalization of smes – Born Global vs. Gradual Global the notion that firms often internationalize like “rings in the water”; their market knowledge increases gradually and hence uncertainty as well as risk is reduced over time for each country market. However The Pace of Internationalization of smes – Born Global vs. Gradual Global, in 1988 Johanson & Mattson pointed out that some firms follow other internationalization patterns. They argued that the degree of internationalization of markets (i.e. the frequency, intensity, and integration of relationships across borders in The Pace of Internationalization of smes – Born Global vs. Gradual Global the particular industry market) has an impact on the internationalization process of the individual firm. In highly internationalized markets, firms may leapfrog some of the stages or rings in The Pace of Internationalization of smes – Born Global vs. Gradual Global the water. More recently many authors, (f.ex. Oviatt & McDougall, 1994; Knight & Cavusgil, 1996; Madsen et al, 1999), have found empirical evidence of yet another type of exporters often labeled “born globals” (BGs), which aim at The Pace of Internationalization of smes – Born Global vs. Gradual Global the international markets or even the global market right from their birth and do not seem to follow any kind of stages e.g. they go beyond leapfrogging.


Knight & Cavusgil (1996) believe The Pace of Internationalization of smes – Born Global vs. Gradual Global that the slowness of the process described in traditional internationalization literature, may be an indication of management’s aversion to risk-taking and their inability to acquire relevant knowledge and information. The fact that the The Pace of Internationalization of smes – Born Global vs. Gradual Global process seems to be speeded up now, may partly be explained by the so called born globals’ management being less risk-averse and/or they having easier access to relevant information. The The Pace of Internationalization of smes – Born Global vs. Gradual Global environment has changed a lot since the “traditional internationalization theories” were developed f.i. the increased level of globalization in many industries, may make out part of an explanation for the observed The Pace of Internationalization of smes – Born Global vs. Gradual Global increase in pace of internationalization of firms. This increased globalization, which is believed to lead people to perceive the world as smaller, may thus also make the manager perceive the risk The Pace of Internationalization of smes – Born Global vs. Gradual Global of entering foreign markets, as smaller. One driver of globalization is believed to be the development of advanced communication technology i.e. an industry described as having high degree of globalization will The Pace of Internationalization of smes – Born Global vs. Gradual Global by definition be characterized by having information transferred easily and faster than in industries less globalized. This increased access to information may decrease the psychic distance between countries, which have previously been seen The Pace of Internationalization of smes – Born Global vs. Gradual Global as a major obstacle for international expansion of firms (e.g. Johanson & Vahlne, 1977).


Oviatt & McDougall (1994) state that recent technological innovation and the presence of increasing numbers of people with The Pace of Internationalization of smes – Born Global vs. Gradual Global international business experience have established new foundations for MNEs. Traditionally these were developed from large, mature, domestic firms, but the facile use of low-cost communication technology and transportation means that the ability The Pace of Internationalization of smes – Born Global vs. Gradual Global to discover and take advantage of business opportunities in multiple countries is not the preserve of large, mature corporations anymore. Crick & Jones (2000) for instance, found that several firms were set up by managers The Pace of Internationalization of smes – Born Global vs. Gradual Global with experience, operating in international markets from previous firms in which they were employed. Thus, they have got experience in dealing with the complexities of international operations, they have acquired an appreciation The Pace of Internationalization of smes – Born Global vs. Gradual Global of the risks and resource implications, and last but not least, they have developed a network of customers and contacts on which they can build on after setting up their own firms. Whatever The Pace of Internationalization of smes – Born Global vs. Gradual Global reason, increasing evidence shows that in spite of small size and inexperience in international transactions, high value-adding manufacturing firms are capable of outperforming their larger, more resourceful counterparts in foreign markets The Pace of Internationalization of smes – Born Global vs. Gradual Global.


According to Bradley (1995), there are basically two dimensions, which represent the key strategic decisions in connection with a firm’s internationalization, (1) international market selection, and (2) choice of entry mode. With The Pace of Internationalization of smes – Born Global vs. Gradual Global regard to the market selection dimension, BGs often start activities in many markets fast (simultaneously) and not always in close markets first. The product is often developed for a global-/international market (Madsen et The Pace of Internationalization of smes – Born Global vs. Gradual Global al, 1999). Bell (1995) explains this in the following way: “..psychic distance has become much less relevant as global communication and transportation infrastructures improve and as markets become increasingly homogeneous”, (p The Pace of Internationalization of smes – Born Global vs. Gradual Global.62). Hedlund & Kverneland (1985) also provide evidence of a speeding up of the internationalization process and posit that: “the establishment and growth strategies on foreign markets are changing towards more direct and rapid entry modes than those The Pace of Internationalization of smes – Born Global vs. Gradual Global implied by theories of gradual and slow internationalization processes”. In other words, it seems the internationalization process of firms is currently proceeding faster on both dimensions (market selection and entry mode) than The Pace of Internationalization of smes – Born Global vs. Gradual Global traditional theory predicts. Traditional theory is here seen as the Process model or Uppsala perspective (Johanson & Vahlne, 1977/1990). Traditional internationalization theories describe a process in which the firm gradually becomes involved in international The Pace of Internationalization of smes – Born Global vs. Gradual Global business and enters foreign markets and this view seems to enjoy general acceptance among most international business scholars.


According to the studies I have found (Knight, 1997; Knight & Cavusgil, 1996; Harveston, 2000, Madsen, Servais & Rasmussen The Pace of Internationalization of smes – Born Global vs. Gradual Global, 1999; Junkkari, 2000), BGs are defined as SMEs with an export rate of more than 25% within three years of founding. I see this as too broad a definition, for instance, if a Norwegian The Pace of Internationalization of smes – Born Global vs. Gradual Global SME export 30% of its products to Sweden and Denmark (within three years) one can hardly call the firm global. In other words, we need to incorporate what type of market (and The Pace of Internationalization of smes – Born Global vs. Gradual Global how many) an SME should be present in to be termed a BG in addition, most very international SMEs usually have a far higher percentage of foreign sales than 25% (e.g. Luostarinen The Pace of Internationalization of smes – Born Global vs. Gradual Global & Gabrielsson, 2001). I therefore choose to define a born global as an SME that export a minimum of 50% within 3 years of founding. But, in addition, to be defined a “true Born Global” (TBG), the The Pace of Internationalization of smes – Born Global vs. Gradual Global SME has to be present in more than one continent simultaneously, e.g. for a Norwegian SME to export 80% to European countries do not qualify to be termed a TBG. For The Pace of Internationalization of smes – Born Global vs. Gradual Global a firm to be labeled BG, Luostarinen and Gabrielsson (2001) also emphasized the presence on several continents. They мейд a distinction between internationalization degree of a firm (Finnish BGs had more than 80% sales outside The Pace of Internationalization of smes – Born Global vs. Gradual Global home) and globalization degree (Finnish BGs were found to have more than 30% sales outside home continent), it might be worth noticing that they used a time frame of 10-15 years.

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